ExxonMobil (XOM) Misses on Lowered Earnings and Revenue

The world's largest oil company, ExxonMobil (XOM: Charts, News), disappointed investors yesterday when it missed Wall Street estimates for its first quarter earnings. Analysts had expected higher energy prices throughout the quarter to boost the company's earnings, which were dragged down by a slowdown in production coupled with weaker North American natural gas prices.

Excluding share buybacks, Exxon earned $2 per share, or $9.45 billion, an 11% decline from the prior year quarter. This missed the average analyst consensus of $2.09 per share. Revenue rose 8.8% to $124.05 billion, which also missed Wall Street's expectations for $124.76 billion. By comparison, Shell (RDS.A: Charts, News), posted an 11% increase in profits.

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Exxon's production declined by 4.55 million barrels of oil, or 5%, per day. Exxon's lower production was attributed to OPEC quota restrictions, which also crimped its natural gas output. Production-sharing contracts with oil-producing countries also limited its production capabilities. While the number of oil rigs across the United States has dropped, profits across the industry have remained relatively steady, partly due to assorted gas byproducts, which are sold off to other basic materials industries.

The company's U.S. upstream business also posted a 21% drop in earnings. Exxon's refineries and chemicals plants in America also posted moderate profit declines. Overseas, Exxon fared better, posting a lighter decline of 8%, or $6.79 billion, in non-US upstream earnings throughout Europe and Asia. The company attributed its international strength to longer-term contracts which keep oil prices more stable.

Compared to its industry peers, Exxon has been weighed down by its 2009 purchase of XTO, a leading US gas producer, which was primarily acquired for its natural gas business segment. Analysts have questioned Exxon's $41 billion investment in XTO, which has yet to become earnings accretive for Exxon, due to slumping natural gas prices in the United States. Natural gas prices are currently at a ten year low, due to a massive supply outweighing weak demand. Exxon attributes the weak demand for natural gas to a warmer winter, which has limited the need for natural gas heating in colder states. Exxon's natural gas production also grew at less than 1% from the previous year. Rival ConocoPhillips (COP: Charts, News) also posted a 1% production decline last week.

Despite current challenges, Exxon posted capital and exploration expenditures of $8.8 billion during the quarter, which continues its plan to invest $37 billion per year "over the next five years". This suggests that Exxon is still moving ahead to find new sources of oil, which will still fuel the world's newer, emerging economies. CEO Rex Tillerson stated, "Despite continuing economic uncertainty, we are progressing our robust investment plans to meet the energy demands of the future." Chevron (CVX: Charts, News), the company's primary rival, is also expected to post similar production declines on Friday. Like Exxon, Chevron's massive Australian natural gas projects and deep-sea drilling in the Gulf of Mexico are expected to keep margins tight over the next three to five years.

On the bright side, Exxon increased its quarterly dividend by 21% to 57 cents per share. The company also bought back $5 billion in shares during the first quarter to reduce float. In the second quarter, the company intends to do the same. Meanwhile, the stock trades with a forward P/E of 9.5 and a 5-year PEG ratio of 1.5, which suggest more upside ahead as energy prices stabilize. Stronger energy prices are dependent on the overall health of the global economy, but Exxon's massive, sprawling resources should allow it to outlive most financial storms on the horizon.

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Published on Apr 27, 2012

By Leo Sun

Leo Sun is a freelance finance writer and position trader. He focuses on a combination of value and momentum investing, with a strong interest in the trading philosophies of Warren Buffett and Peter Lynch. Leo also has experience writing articles to help small business owners acquire loans and manage their finances. He regularly contributes to the Stock of the Day analysis.